Back in force: Debt limit deniers

Wall Street and the White House are warning that failure to raise the nation’s debt limit will result in an economic apocalypse. “There is no silver bullet. There is no magic wand that allows us to wish away the chaos that could result,” President Barack Obama said on Tuesday.

But there is a hard-core group of Republicans in Congress who say it’s just not true. Yes, the debt limit deniers are back in force.

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You can spin all the scary tales of default you want and they won’t believe you. They say if the $16.7 trillion borrowing limit is not raised by Oct. 17, as Treasury demands, then the U.S. government will still collect more than enough cash each month to keep paying bondholders. And if Uncle Sam can’t pay Social Security recipients or anyone else while it forks over interest payments to the Chinese?

“Tough luck,” these people say. The nation spends too much as it is. Blocking a debt ceiling increase will provide the radical shock therapy the nation desperately needs to start living within its means.

“We have 10 times as much tax revenue as we’ve got annual interest on the debt obligations,” Rep. Mo Brooks (R-Ala.) said in an interview, offering the key talking point of the debt limit denial caucus. “So if the president does not want us to default on our credit or obligations, we won’t.”

Other members say they based entire campaigns on not boosting the borrowing limit.

“I ran on not raising the debt ceiling,” said Rep. Ted Yoho (R-Fla.). “We will not default. And I think it’s a lot of hype that gets spun in the media.”

The persistence of this point of view helps explain how raising the debt limit transformed over the past three years turned from a largely pro forma exercise in grandstanding into a high-stakes game of political chicken with the fate of the global economy hanging in the balance.

The party out of the White House has long used debt limit votes as opportunities to score political points by arguing for spending restraint. Obama himself did this while a senator in 2006, voting against raising the debt ceiling, something the president now says he regrets. The debt limit deniers often point to that vote when making their case.

But these votes were generally done with an understanding that they were symbolic and that a debt limit increase would still pass. That cozy consensus is now pretty much gone, blown away by tea party candidates elected in 2010.

“Spending a day highlighting the debt and the deficit in Congress as part of raising the debt ceiling is probably a healthy thing,” said Tony Fratto, a consultant at Hamilton Place Strategies and a White House and Treasury official under President George W. Bush. “But the moment you start talking seriously about not raising the debt limit it becomes dangerous. And a lot of members of Congress are now saying things that give evidence that they have no idea what they are talking about when it comes to the debt limit and the way government financing works.”

Fratto was speaking about the most fervent believers in the debt ceiling denial caucus, including Yoho, who recently told The Washington Post that failure by the U.S. to raise the debt limit “would bring stability to world markets.”

Yoho’s view is belied by current action in the global markets: Stocks are dropping triple digits each day, volatility is rising and Treasury is already facing far higher borrowing costs on short-term debt.

There is growing fear that investors could start pulling cash out of money market funds, which hold large amounts of short-term government debt, possibly freezing up credit markets the same way the collapse of Lehman Brothers did in 2009, leading to the worst financial crisis since the Great Depression.

Richard Burr, Republican senator from North Carolina, said this week that he was “not as concerned as the president is on the debt ceiling, because the only people buying our bonds right now is the Federal Reserve. So it’s like scaring ourselves.”

This statement ignores that nearly $6 trillion — almost half of outstanding debt held by the public — is owned by foreign governments, including $2.4 trillion by China and Japan alone. Both of those nations this week warned the United States against doing anything that would put these massive investments at risk.